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SA re-enters FDI confidence index, but placed last

Apr 25 2017 20:00
Lameez Omarjee

Johannesburg – South Africa re-entered a global foreign direct investment confidence index since 2014, but placed last out of 25 countries.

South Africa is one of two African countries, the other being the United Arab Emirates, which are part of the AT Kearney foreign direct investment (FDI) confidence index. The country scored 1.42 points on the index, its re-entry suggests that FDI flows may increase in the coming years.

READ: SA foreign direct investment jumps 38% in 2016 – Unctad

Last year the United Nations Conference on Trade and Development (Unctad) reported an increase in FDI to the country by 38%. However FDI was still relatively low at $2.4bn, Fin24 reported.

There is a “mixed outlook” for the country’s ability to attract FDI going forward. This is due to challenges linked to governance, the exchange rate volatility and a “decreased trust” in political leaders, said the report.

However, there may be a turnaround if the country makes the most of its improving economic growth outlook, now at 0.8% and its role as a gateway to the rest of Africa. The report said that South Africa is a gateway for investment for more than one billion people in sub-Saharan Africa.

The population in this region is expected to grow, creating a need for investment for infrastructure development. Industry investors prefer to invest in South Africa, compared to other sectors, the report explained.

South Africa is positioned to be a leading manufacturing hub for the region. Automobile production particularly has been a strong source of investment for the country, the report said. In 2016, BMW alone invested $417m in its car manufacturing operations for the X3 sports utility vehicle.

ALSO READ: Mergers and acquisitions to feel the impact of the downgrade

Given the country’s recent downgrade to junk status, analysts have expressed concerns that FDI flows may be reduced, further impacting merger and acquisition (M&A) activity.

Kevin Cron, head of corporate mergers and acquisitions at Norton Rose Fulbright, told Fin24 that  foreign investors may be more cautious now that the country is rated at sub-investment grade.

He added that there may still be opportunities for investors with a “bigger risk appetite” and may consider it as a chance to get assets in South Africa, more cheaply.

Overall the report showed that FDI to emerging market countries had increased from 20% in 2016 to 28%, due to a growing intention to diversify and greater appetites for risk. Two emerging market countries were placed in the Top 10 of the index, these being India and China. Investors are also spotting frontier markets.

However, developed countries continue to dominate the index with 72% of the positions. Strengths of developed markets include efficient regulations, transparent tax rates and strong technological capabilities, among others.

Political risk continues to influence investor decisions. Developed markets are favoured for this reason as they are perceived to be secure and have transparent regulatory environments.

The US retained top spot for the fifth consecutive year in a row, despite the outcome of the US presidential election which was previously seen to deter investment. The size of the US market, its open regulatory environment were among its strengths. Investors who want to maintain a local presence in the country given rising protectionism is also a motivating factor.

About 75% of investors expect to increase FDI in the next three years. Investors also remain bullish about the global economic outlook, with 60% being optimistic about the future, the report revealed.

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